Retirees face few major financial risks like inflation. As we age, we tend to invest more in stable, income-generating bonds than in volatile stocks – and bonds, which have a fixed payout, suffer. more if consumer prices rise? fall? more than expected.
It’s no surprise that these are uncomfortable times for retirees. Consumer inflation hit 6.2% last month, the highest level in 30 years.
So naturally, the same conventional wisdom of the Acela corridor that said there won’t be any inflation now says it’s here to stay. Previous comments by the Federal Reserve, that inflation could be “transient”, is on fire now.
Maybe inflation is here to sustain, maybe not. But before these people freak you out, here are 10 points to keep in mind.
The size of the current inflation, and whether it is “transient” or not, are entirely different things. That’s like confusing the volume of a song with its duration or the height of the Empire State Building with its width. Temporary inflation does not refer to the size of the current inflation, but only to how long it will last. For example, inflation can rise really, really hot for six months and then crash. So, the current increase in inflation may or may not lead to persistent inflation. But we don’t know. Anyone confused between these two can safely be ignored.
The story of the 1970s proves nothing. As someone who trained to be a professional historian, I laugh when people tell me that history doesn’t repeat itself, it “rhymes”. Sometimes it rhymes, sometimes it doesn’t. As the Greek philosopher Heraclitus once said, no one can cross the same stream twice because the second time it is not the same stream – and you are no longer the same person. Everything changes.
If inflation is no longer “transient,” someone has to explain to me why the bond market is still predicting no more than 2.6% inflation over the next 10 years. And that’s still medium, including current, hot, reading. In other words, the bond market still expects inflation to return, above 2%, for much of the next decade. What do these people know that the bond market doesn’t?
In fact, if all these people are sure that we’re headed for 1970s-style inflation, they ought to explain to me why they’re still writing for a living, when can they quit their jobs? , bet on skyrocketing inflation using financial options and derivatives, and make a billion dollars. Why do they even bother coming into the office? Eurodollar markets are still predicting that short-term interest rates will be around 2% in five years’ time. If you know we’re going to party like it was in 1973, that’s an easy one-way bet. Call us from your yacht!
If inflation is definitely here, why isn’t gold?
through the roof? Instead, the traditional inflation hedge has fallen 7% so far this year and is lower than in 2012.
Federal Reserve Bank of San Francisco argues that much of the inflation we are seeing is due to short-term factors caused by the pandemic, and argues that inflation from fundamental, long-term forces is no higher than it was a few years ago, when people are concerned about deflation, not inflation. Are they wrong? If so, why?
One key factor: Our society is still aging, and we will increasingly have older people and retirees supported by a small fraction of the working population. Strategist Albert Edwards of SG Securities, Quote from independent economist Eric Basmajan, suspect it’s deflation, not inflation. And – with Heraclitus’ warning mentioned above – the Japanese example seems to agree. Old Japan has been trapped in a deflationary cycle for decades, despite running fiscal deficits and printing money.
Yes, wages are rising and employers can’t get enough employees at current wages. And yes, it’s inflation, just like in the 1970s, dominated by unions. But… not only are private sector unions unlike them, but today automation and technological innovation are displacing labor at an astonishing rate. What will online shopping mean for retail rents? Or work from home to pay office rent? I write so many, so much About retreat and nursing care, subjects close to the retiree’s heart. There is a shortage of skilled workers and that will drive wages up. On the other hand, many jobs that once required highly skilled labor can now be replaced by cheap technology. Apple Watch $300
can now monitor a nursing home resident’s vital signs 24/7 – something that previously required a full team of skilled staff. Is this inflation or deflation?
Inflation is not a price level, but a continuous annual change in prices. For example, over the past year, the price of crude oil has increased from about $45 per barrel to $78 per barrel, an increase of about 73%. Like Liberum strategist Joachim Klement shown, there is a very close historical relationship between one-year changes in oil prices and one-year changes in US consumer prices. But the question here is not what just happened to oil prices, but what happens next. Do we expect oil prices to increase another 73% in the next 12 months, to $134/barrel? And then another 73% in November 2023, to $233 a barrel (easily an all-time record)? Okay, so it’s more complicated than that: An increase in the price of oil for a year raises other costs, which will then be delivered through the system. On the other hand, if oil prices continue to soar, how will that not do what oil prices skyrocketed in 2008 – help push American consumers into recession? Extrapolating the recent price increase into the future could be like trying to drive a car by looking in the rearview mirror.
Finally: I remember many years ago participating in a business school simulation called “beer game”“. I don’t want to spoil the experience for others, but the game simulates a supply chain under uncertain conditions. The amazing conclusion is how much small changes at one end of the chain can produce, interleaved other fluctuations, something economists call the “cow-whip effect”. Relevance today: How likely is it that we can shut down the world for a year, flip the switch back on, and not see a sharp increase in short-term arbitrage? Why would that even be a subject for debate? And amid such shortages and turmoil, why would anyone confidently claim to be able to predict the long-term inflation picture?
https://www.marketwatch.com/story/10-reasons-not-to-panic-about-inflation-just-yet-11637968251?rss=1&siteid=rss Opinion: 10 reasons not to panic about inflation